Oil and Gas: Parent company liability for the tortious acts of its subsidiary - Practical considerations

Oil and Gas: Parent company liability for the tortious acts of its subsidiary - Practical considerations

Stuart Carter and Volkan Palanci offer some practical considerations to oil and gas companies arising from key cases on the subject of parent company liability for the tortious acts of its subsidiary.

Introduction

In the recent cases of Okpabi & Others V Royal Dutch Shell Plc ("Okpabi"); and in AAA & Others V Unilever Plc and Unilever Tea Kenya Limited ("Unilever"), the Court of Appeal considered the relationship of 'proximity' or 'neighbourhood' (control) between the UK parent company of a foreign subsidiary and that of the relevant claimants. The Court of Appeal held in both cases that the UK parent company did not possess the necessary degree of control over the operations of its foreign subsidiary to substantiate the imposition of a duty of care towards the claimants. The corollary to this is, if the necessary degree of control could be established then the parent company would indeed owe a duty of care for the tortious acts of its subsidiary and could be liable towards the claimant(s). This is of particular importance to the oil and gas sector where it is common for a parent company to provide technical expertise and support, management resourcing and oversight to a subsidiary that holds a petroleum interest, thereby potentially creating the necessary degree of control over its subsidiary. Flowing from this, the parent company may be exposed to a claim arising from the tortious acts of its subsidiary, on account that a duty of care has been established. In this publication we examine the steps and counter-measures that a parent company may consider undertaking, in order to reduce the risk of creating a duty of care arising from the tortious acts of its subsidiary.

Relationship between the parent company and subsidiary

The issue is one of balance. The more involved a parent company is with the operations and management of its subsidiary so the risk increases that the parent company will be held liable for the tortious acts of its subsidiary. Some practical counter-measures that can be considered:

1. Corporate structure - ensure the subsidiary keeps a clear and separate identity from the parent company

The Court of Appeal identified six areas that needed to be considered when seeking to determine the level of separation.

Locality: In order to emphasise the separate business nature of the parent company with that of its subsidiary, consider whether practically they can operate through different business premises;

Shareholding: Restrict any holding in the subsidiary to ordinary shares without any special preferences and seek to deal with the subsidiary as if it were an investment vehicle;

Relationship: Provide for a corporate structure that includes intermediate subsidiaries, ideally through other jurisdictions. For reasons of tax efficiency and investment treaty protection there may exist other commercial reasons why a 'chain' of intermediary subsidiaries may be utilised. Reducing the risk of liability for the tortious acts of the subsidiary may provide the management of the parent company with further incentive to give careful consideration to several layers of subsidiaries, off-setting the inevitable increased administration required to manage a more complex corporate structure;

Board and committee representation: Where possible provide for different people to sit on the board of directors as well as provide for separate representation on committees;

Business activities: Seek to reduce the overlap and duplication of the nature of the business conducted by a parent company and its subsidiary; and

Guarantees and indemnities: Where it is necessary for the parent company to provide guarantees and indemnities, consider including express language that emphasises the 'business independence' of the subsidiary.

2.Empower the subsidiary to adapt group-wide policies and/or guidelines to local circumstances

The presence of group-wide policies and/or guidelines issued by a parent company is common practice and can be an indicator of a well-managed and organised corporate group. This was recognised by the Court of Appeal in the Okpabi and Unilever cases. However, a strict and unbending implementation of these by the parent company may also send out the wrong signal that through their implementation the parent company is seeking to manage and control the operations of the subsidiary. To counteract this impression, some practical measures can be taken and consideration should be given to the following:

Intention: For the parent company only to issue group-wide policies and/or guidelines throughout the group for the purpose of ensuring compliance with industry standards and best practice;

Implementation: Ensure that group-wide policies and/or guidelines in relation to operational activities are applied and implemented by the subsidiary locally (ensuring that central direction, advice or review is kept to a minimum), even if initiated by way of group-wide policies and/or guidelines;

Application: All group-wide policies and/or guidelines should be applicable to all of the companies within the group. Avoid targeting or singling out particular subsidiaries;

Control: The existence of group-wide policies and/or guidelines should not be used by the parent company to exert managerial control over the subsidiary;

Review: Subsidiaries should be given the latitude to adapt the group-wide policies and/or guidelines to fit with local circumstances;

Language: Within group-wide policies and/or guidelines avoid making reference to mandatory terms or instructions such as; "all group companies must…"; and instead make reference to 'suggestions', in order to avert any assertion of control (whether direct or indirect);

Disclaimer: For the parent company to refute any responsibility for the acts of a subsidiary by stipulating a properly worded disclaimer in the relevant group-wide policies and/or guidelines; and

Management: Structure the management of the group in a manner that the parent company has no involvement with the day-to-day operations and decision making of the subsidiary, particularly in relation to health and safety; and

Advice: The parent company to refrain from giving advice to a subsidiary in relation to the management of risks affecting its business.

Conclusion

Whilst it should be an aspiration to remove completely any risk of the parent company being held liable for the tortious acts of its subsidiaries, the reality is that the risk can never be wholly eliminated as long as the companies continue a group relationship. The objective will be to manage the risk down to a level where it becomes acceptable to the parent company. The guidance provided in this publication will help direct a parent company on how to achieve that objective but as the law evolves in this area, a parent company should keep under review its group procedures and business relationships with its subsidiaries, if it is to ensure that the risks of being held liable are kept to levels that are acceptable to its management.

Volkan Palanci (Co-Author) is a Trainee Solicitor from the Canary Wharf Group Plc and is currently on secondment in the Corporate Department at Fieldfisher and contributed to the article.